Biden’s New Playbook for Greening the Financial System

The Biden administration should fit climate risk into those sorts of tests, Arkush said. It should first make sure that banks don’t face too much “physical risk,” the name for damages wrought directly by the floods, wildfires, and droughts of climate change. (This kind of risk took California’s largest utility, PG&E, into bankruptcy in 2019.)

But it should also grade banks on “transition risk,” the chance that fast-changing climate policy could leave their investments worthless. “If it actually looks seriously like the world is gonna cut carbon emissions in half by 2030, you could, overnight, see fire sales of fossil-fuel assets,” Arkush told me. Then, in addition to facing climate change, he said, we might also be facing a financial crisis.

Under Dodd-Frank, the financial-reform bill that was passed after the global financial crisis, the government can also run stress tests on financial institutions that aren’t banks. Ambitious regulators could use this law to investigate whether BlackRock, the world’s largest asset manager, or Berkshire Hathaway, one of the country’s largest stock-holding companies, is adequately prepared for climate change.

3. Changing market rules so that investors have more information about how climate change affects their investments.

Right now, the government forces companies to disclose a variety of information about themselves in order to help people make investments. It should require similar disclosures about how companies contribute to and could be affected by climate change, Arkush said, so that investors can both pick the least risky stocks and invest in line with their values.

Large investors should also be made to survey their clients about how to invest, he said: If their clients don’t want to damage the climate with their investments, then asset managers should act accordingly. The government should also generally ensure that investments labeled “green” are actually green.

Climate-finance regulation is a heated topic right now. For the past few months, the European Union has been engaged in a bizarrely meticulous effort to define exactly what kinds of investments are green. This regulatory scheme, called the “green taxonomy,” has become about as politically messy as you can imagine. Is a natural-gas plant green? What about a nuclear plant? Each decision prefigures who will win and who will lose.

It’s almost as if Continental bureaucrats are spinning up a climatic version of the Napoleonic Code, specifying each possible offense and how it should be punished. The American legal system doesn’t work like that. Here, lawmakers lay out abstract principles, then regulators and judges apply them.

That’s the ultimate goal of the roadmap. The Biden administration will probably never say This investment good, that investment bad, but it will fit the climate transition into our existing systems for governing the market.